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22 January 2018
The Banking Association South Africa (BASA)
Submission in terms of comments on the Draft National Credit Amendment Bill published in the Government Gazette
No. 41274 of 24 November 2017
Version 1.0
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Contents
1. Purpose of this document ..................................................................................................................... 1
2. Current Credit Landscape ...................................................................................................................... 2
3. Regulatory Credit Journey since 2007 .................................................................................................... 2
4. Existing Debt Intervention Mechanisms ................................................................................................ 4
5. Key Concerns with the Bill ..................................................................................................................... 7
5.1 Unconstitutional Concerns with the Bill ............................................................................................. 7
5.1.1 Clauses dealing with Reckless Credit Agreements: ............................................................................. 7
5.1.2 Clauses dealing with Debt Intervention: ............................................................................................ 7
5.1.3 Clauses dealing with “Credit Life Insurance”: ................................................................................... 12
5.2 Legal and Operational/Practical Implementation Concerns with the Bill. ........................................ 14
5.2.1 Clause 1: ......................................................................................................................................... 14
5.2.2 Clause 11: ........................................................................................................................................ 14
5.2.3 Clause 14: ........................................................................................................................................ 15
5.2.4 Clause 6 and Clause 10: ................................................................................................................... 16
5.2.5 Clause 4: ......................................................................................................................................... 16
5.2.6 Clause 17: ........................................................................................................................................ 17
5.2.7 Clause 23 and Clause 24: ................................................................................................................. 17
5.3 Economic and Social Impacts of the Bill. .......................................................................................... 18
5.3.1 High Level statistics on consumers that could qualify to apply for Debt Intervention ....................... 18
5.3.2 Consumers and Credit Providers: .................................................................................................... 21
5.3.3 Cost of Credit/Access to Credit: ....................................................................................................... 21
5.3.4 Impact on the Banking Industry: ...................................................................................................... 21
5.3.5 Impact on the Economy: .................................................................................................................. 23
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6. Proposed Solutions to assist Over-‐Indebted Consumers ...................................................................... 24
6.1 Key Principles of Sustainable Debt Intervention Mechanisms .......................................................... 25
6.2 Proposed Solutions to address the gaps that currently exist ............................................................ 26
6.2.1 No Income No Assets Debt Intervention Measure: .......................................................................... 28
6.2.2 Poor Man’s Sequestration: .............................................................................................................. 28
6.2.3 Subsidised Debt Review: ................................................................................................................. 28
6.2.4 Debt Intervention After-‐care ........................................................................................................... 28
6. Conclusion ........................................................................................................................................... 28
7. Annexures ........................................................................................................................................... 30
7.1 Annexure A – BASA Response comments on the clauses in the Bill .................................................. 30
7.2 Annexure A1 – List of the regulations the Bill permits the Minister to prescribe .............................. 30
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BASA submission in terms of comments on The Draft National Credit Amendment Bill
1. Purpose of this document
The Draft National Credit Amendment Bill (the Bill) was published in the Government Gazette, No. 41274 of 24 November 2017, wherein comments were invited from the public in response to the Bill.
The Banking Association South Africa (BASA) would like to thank the Honourable Ms. Fubbs (MP) and the Portfolio Committee on Trade and Industry (the Committee) for extending the submission due date to 22 January 2018 and for the opportunities afforded to us to date to engage and discuss the debt intervention measures proposed by and deliberated on by the Committee to alleviate over-‐indebtedness. We look forward to engaging the Committee further when making our oral submissions. We request that BASA be given an hour and half to present at the public hearings due to the significant impact of the proposed Bill on the banking sector and the magnitude of our comments.
The banking sector is a critical stakeholder in the assessment, review and feasibility of the proposed debt intervention measures given that banks grant 76.3% of new credit in the market (Source: NCR Consumer Credit Market Report, Q3-‐2017). Banks support the purposes of the National Credit Act 34 of 2005 as amended (NCA) and believe that over-‐indebtedness is a social and economic challenge that has far reaching consequences for the economy and society. In support of consumers that became over-‐indebted and entered the debt review process, banks granted concessions to consumers (including voluntary concessions in line with the Task Team Agreements between credit providers and the NCR) of R3.425 billion in 2016 and R3,976 in 2017. Furthermore, because of the amendments to the NCA, which became operative in March 2015, an obligation was placed on credit providers to pro-‐actively ensure that they do not collect, re-‐activate or sell prescribed debt. This resulted in banks expunging a total of R 9,252 billion across various credit agreement types. Banks continue to expunge sizable prescribed debt monthly, in line with existing legislation.
The aforementioned paragraph illustrates that banks are supportive of targeted and sustainable debt intervention measures. The implementation of any new measures should not introduce instability into the credit market as this will have a further negative impact on society and the South African economy.
To this end, BASA and its member banks are busy conducting an assessment to understand the system-‐wide impact of the proposed Bill, amendments to the NCA, from both a quantitative and qualitative perspective, on the South African economy and society. The results of our impact assessment will assist in constructively informing the Committee’s legislative considerations and will be submitted to the Committee on 7 February 2018, as was confirmed by the Secretary of the Committee.
This submission encapsulates BASA’s response to the proposed Bill. Following the Committee’s receipt of our submission, BASA would welcome further engagements with the respective stakeholders, as well as the Committee and the Parliamentary Legal Advisor, to respond to any questions in respect of and discuss in greater detail the specifics contained in our submission.
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2. Current Credit Landscape
Diagram 1 – Credit industry overview and legislative timeline from 2007 to 2017
Source: NCR Consumer Credit Market Report and NCR Credit Bureau monitor Q3-‐2017
As per the Consumer Credit Market Report, Q3-‐2017published by the National Credit Regulator (NCR), the relevant statistics in terms of lending are as follows:
a) As at the end of September 2017: Credit bureaux held records for 25.08 million credit-‐active consumers, an increase of 1.2% when compared to the previous quarter.
Consumers with impaired records have reduced since 2015 and are currently at levels last observed in 2008. As is evident from Diagram 1 above, credit granted (credit growth) has slowed significantly and has become basically stagnant over recent years. A balanced view to the implementation of new legislation should therefore be considered to ensure that access to credit is not unnecessarily constrained.
3. Regulatory Credit Journey since 2007
Over the past 10 years there have been a vast number of changes in the regulatory credit landscape, as follows:
a) June 2007:
The National Credit Act (Act No. 25 of 2005) became effective as part of a comprehensive legislative overhaul designed to protect consumers and make credit and banking services more accessible, within the context of a responsible and efficient credit market. The NCA was introduced “to promote and advance the social and economic welfare of South Africans,
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promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry, and to protect consumers.”
b) 2008:
There is a sharp reduction in the credit granted by credit providers, following the increasing number of customers with impaired records during the global financial crisis.
c) Q3 2009:
Credit granting starts to normalise and the level of consumers with impaired records start stabilising, albeit at a higher level.
d) September 2010:
The NCR Task Team Recommendations (TTR) were released by the NCR. The TTRs identified process improvements in the existing debt review process, under section 86 of the NCA, and tabled concession rules that the credit industry, and more specifically the credit providers, had agreed to, that go beyond what is required in terms of the NCA, particularly in the reduction of interest rates and fees and charges to assist indebted consumers.
e) February 2011:
The industry-‐wide agreed concession rules, tabled in September 2010, were implemented via the Debt Counselling Rules System (DCRS). This resulted in an over-‐indebted consumer being able to apply for debt review via a debt counsellor and to have his/her credit agreement restructured, if there was a “solve”, i.e. enough affordability from the consumer to repay their debt, once the interest rate had been decreased, and the fees and charges foregone.
f) October 2012:
A Joint statement from BASA and National Treasury on Responsible Borrowing and Responsible Lending was released following an agreement between representatives of the major retail banks, BASA, the National Treasury, the South African Reserve Bank and the Financial Services Board to consolidate responsible lending and prevent households from being caught in a debt spiral. The accord called for several measures to be taken, including a review of the credit affordability assessments, appropriate intervention measures for distressed consumers, reviewing the use of debit orders, limiting the use of Emolument Attachment Orders 1(EOA’s), and providing consumer education for these various initiatives and for taking on credit.
1 Emoluments Attachment Orders (EAOs)) – an EAO is a court order whereby the judgment creditor is able to attach a portion of the remuneration of the judgment debtor (employee)
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g) April 2014:
The removal of adverse credit information and paid-‐up judgments was implemented, resulting in a stepped decrease in the number of customers with impaired records. This however did not result in a sustained improvement.
h) March 2015:
The NCA was amended, which placed an obligation on credit providers to pro-‐actively ensure that they do not collect or sell prescribed debt, which was a further debt intervention measure that provided debt relief.
i) September 2015:
More stringent affordability assessment criteria were introduced by the Minister of Trade and Industry by way of regulation. The implementation of the criteria by the credit providers meant fewer consumers qualified for access to credit, thereby reducing the credit granted and extended.
j) May 2016:
The Limitation of Fees and Interest Rates regulations, as prescribed by the Minister of Trade and Industry, became effective and sought to make credit more affordable. This however resulted in less credit being granted and extended to low-‐income earners in the formal credit sector.
k) August 2017:
The Credit Life Insurance (CLI) regulations came into effect to prescribe a cap on the cost of CLI, as well as minimum features and benefits of CLI products. The effect of these regulations is not yet evident and will have to be tracked over time.
The market is beginning to see some reduction in levels of indebtedness and improvement of consumer behaviour. However, BASA is of the view that we need to allow some time for the series of legislative changes implemented over the past few years to be embedded, so that we can all consider both positive and negative impacts, before implementing further legislative debt intervention measures.
4. Existing Debt Intervention Mechanisms
There are a number of existing direct (i.e. a consumer may approach a debt counsellor, an alternative dispute resolution agent, a consumer court, an ombud with the relevant jurisdiction, prescription of debt, debt administration, sequestration, etc.), and indirect (i.e. credit providers decreasing the interest rate, waiving fees, extending the term of credit agreement, granting payment holidays, suspending payments, allowing a consumer to restructure or reschedule payments, providing the consumer with an opportunity to consolidate his or her credit products into a new consolidated
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credit product and in some bespoke cases writing off / extinguishing debt) debt intervention measures that consumers can make use of to assist them when over-‐indebted.
The following must be noted in relation to, inter alia, the direct and indirect debt intervention measures mentioned above:
a) The current debt review mechanisms provide substantial debt relief to thousands of consumers. Important to note is that the industry is already offering and providing extensive concessions to over-‐indebted consumers, in the form of debt review mechanisms, enabled by the NCA, and voluntary concessions that go beyond the requirements of the NCA. These concessions include voluntary concessions made by credit providers by way of interest rates reductions, fees and charges being forgone and credit agreement terms being extended, which reduces the monthly repayments for the over-‐indebted consumer;
b) As at December 2016, the total debt review portfolio across the major retail banks stood at a value of R 47,342 billion, with reduced interest rate concessions being provided to over-‐indebted consumers by the banking industry in the region of R3,425 billion for 2016;
c) As at December 2017, the total debt review portfolio across the major retail banks stood at a value of R51,484 billion, with reduced interest rate concessions being provided to over-‐indebted consumers by the banking industry in the region of R3,976 billion for 2017 (based on the same % concession as 2016). These concessions include those made under the indirect (voluntary) debt review measures.
d) As a result, the R3.425 billion in 2016 and the R3,976 in 2017 is what consumers were spared from paying in interest to the banks, as the banks opted to forego this interest, to come to a payment arrangement that would be within the consumer’s means;
e) Effective March 2015, an obligation was placed on credit providers by way of amendments to the NCA, to pro-‐actively ensure that they do not collect or sell prescribed debt. This resulted in the banks expunging a further amount of R 9,252 billion across various credit agreement types. This is in addition to the already existing concessions which are granted on an annual basis. The banks continue to, monthly, expunge sizable amounts of prescribed debt in adherence to the NCA.
It is evident from the above that credit providers are already offering sizeable concessions to assist over-‐indebted consumers.
The debt review measure is however not always a feasible option for consumers with no income or the poor and low-‐income segment of the consumer market, as they are unable to afford the debt counselling fees and legal fees. Similarly, debt administration and sequestration can be unaffordable for consumers with no income or the poor and low-‐income segment of the consumer market. BASA is of the view that the constraints posed by the existing direct and indirect debt intervention measures can be overcome through the amendment of existing legislation to cater for debt intervention measures that are based on and complementary to the existing debt intervention measures. We are thus convinced there is no need to create new debt intervention measures, as is proposed in the Bill.
Diagram 2 overleaf illustrates the gaps that exist for consumers where there is currently no resolution after having considered the existing direct debt intervention measures. The solutions proposed by BASA for each of these areas are discussed in greater detail in Paragraph 6 Proposed Solutions to assist over-‐indebted consumers
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Diagram 2: Flowchart of the gaps that exist after having considered the existing direct debt intervention measures
Source: Prepared by National Treasury for the Committee and presented at the deliberations of 14 June 2017
And
Over-‐indebted consumer
No income Regular income
No assets Assets
No resolution
Debtor solvent Insolvent
Debtor sells assets and repays debt
Debtor approaches High Court to declare
insolvency and apply for voluntary sequestration
Sufficient assets to cover cost of sequestration
application
Total debt less than R50 000
Apply for debt review
Application for debt administration ito section 74 of MCA
Judgement granted
Administrator appointed to
distribute payments to creditors
Debtor declared over-‐indebted
Debtor declared not over-‐indebted
Assess for reckless lending
Application declined
Challenge reckless lending
Court determines whether the sequestration will be to the advantage of creditors
Yes -‐ Sequestration order issued
Consumer pays according to the payment proposal
Income <R7 500
Debt counselling unaffordable
No resolution
No resolution
Income >R7 500 (conservative est)
Assessment for over-‐
indebtedness
No assets
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5. Key Concerns with the Bill
BASA submits that there are several concerns from a constitutional, legal and operational/practical implementation, well as from a socio-‐economic and societal perspective. Each of these will be dealt with separately and, where relevant, supported by detailed Annexures as referenced.
5.1 Unconstitutional Concerns with the Bill BASA contends that several provisions of the Bill present as unconstitutional, as follows:
a) Clauses dealing with Reckless Credit Agreements;
b) Clauses dealing with Debt Intervention; and
c) Clauses dealing with “Credit Life Insurance” (CLI).
5.1.1 Clauses dealing with Reckless Credit Agreements:
The proposed section 82A deals with the suspension of reckless credit agreements. BASA submits that it is unconstitutional in the following respects:
a) the proposed section 82A(1) provides that, if a credit provider during an assessment for a new credit agreement reasonably suspects any previous credit agreement of being a reckless credit agreement, it must report that suspected reckless credit agreement to the National Credit Regulator (NCR). Where the suspected reckless credit agreement was concluded by the credit provider that is conducting the assessment, then the proposed section 82A(1) obliges that credit provider to report itself. Since it is a criminal offence for a credit provider to enter into a reckless credit agreement (refer the proposed section 157B(1)(d)), the provision violates the privilege against self-‐incrimination in section 35 of the Constitution. In other words, the proposed section 82A(1) is unconstitutional because it obliges a credit provider to report to the NCR that it has committed a criminal offence; and
b) the proposed section 82A(5) empowers the NCR to issue a notice to the credit provider suspending a reckless credit agreement. The NCR cannot be authorised to suspend a reckless credit agreement, since it is an investigative body and not an adjudicative body. The proposed section 82A(5) further makes no provision for a hearing to be afforded to the credit provider before the notice of suspension is issued. This violates section 33(1) of the Constitution, which guarantees the right to procedurally fair administrative action. It also violates section 25(1) of the Constitution because it deprives the credit provider of its property in a manner that is procedurally unfair.
5.1.2 Clauses dealing with Debt Intervention:
The Bill contains two mechanisms dealing with debt intervention. The first is contained in the proposed sections 88A to 88E; and the second is contained in the proposed section 88F. BASA submits that both mechanisms are unconstitutional.
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5.1.2.1 Sections 88A to 88E:
The proposed sections 88A to 88E create a mechanism in terms of which a “debt intervention applicant” may apply to the NCR for “debt intervention”. If the NCR concludes that the applicant qualifies for debt intervention, it must make a recommendation to the National Consumer Tribunal (NCT) that the applicant be granted “debt intervention”. The NCT may then suspend the credit agreements of the applicant for twelve months, which period may be extended for a further twelve months. If the financial circumstances of the applicant do not improve during that period, the NCT “must declare the debt under the qualifying credit agreements as extinguished” (refer the proposed section 88C(4)). BASA submits this mechanism is unconstitutional for the following reasons:
a) Procedural Unfairness:
i. the proposed section 88B does not provide for any participation by the credit provider at the time when the NCR is investigating an application for debt intervention. In other words, a credit provider is deprived of any opportunity to make submissions to the NCR during the investigation;
ii. if the NCR recommends to the NCT that debt intervention should be granted, then the proposed section 88C(1) provides that “an application for the debt intervention may be considered by a single member of the Tribunal, with reference to the documents included in the referral from the National Credit Regulator only, without further evidence being led”. Similarly, the proposed section 142(3A) makes it plain that the NCT will have regard to the documents included in the referral from the NCR but that no further evidence will be led; and
iii. the effect of these provisions is that the NCT is empowered to grant far-‐reaching orders (as contained in the proposed section 88C) without affording any hearing to the credit provider whose rights will be adversely affected. This is directly in conflict with elementary rules of procedural fairness. It violates the right to a “fair public hearing” in section 34 of the Constitution, and the right to procedurally fair administrative action in section 33(1) of the Constitution.
b) Property Clause:
BASA submits that the proposed sections 88A to 88E permit arbitrary deprivation of property, and therefore fall foul of section 25(1) of the Constitution, for the following reasons:
i. the proposed sections 88A to 88E will apply to loan agreements that were concluded before the commencement of the Bill, since the total unsecured debt of an applicant must not have exceeded R50 000 on 24 November 2017. These provisions will therefore operate with retrospective effect. The Supreme Court of Appeal has explained the distinction between “retroactive” and “retrospective” legislation as follows: “A retroactive statute is one that operates as of a time prior to its enactment. A retrospective statute is one that operates for the future only. It is prospective, but it imposes new results in respect of a past event. A retroactive statute operates backwards. A retrospective statute operates forwards, but it looks backward in that it attaches new consequences for the future to an event that took place before the statute was enacted. A retroactive statute changes the law from what it
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was; a retrospective statute changes the law from what it otherwise would be with respect to a prior event.” 2;
ii. vested contractual rights constitute “property” within the meaning of section 25 of the Constitution. The rights of a credit provider under a loan agreement concluded before the commencement of the Bill, are protected by the property clause in the Constitution. The proposed sections 88A to 88E will interfere with those property rights in that the proposed sections 88A to 88E envisage that a credit provider’s rights under a loan agreement may be extinguished by an order of the Tribunal. BASA submits that this amounts to an expropriation of property within the meaning of section 25(2) of the Constitution. Since the Bill does not provide for compensation to be paid to the credit provider whose property is expropriated, it violates section 25(2) of the Constitution. Even if there is no expropriation, the proposed sections 88A to 88E provide for an arbitrary deprivation of property in violation of section 25(1) of the Constitution as follows:
o the Bill envisages that a credit provider’s contractual right to recover a loan will be extinguished in certain circumstances. This amounts to a deprivation of property;
o section 25(1) of the Constitution provides that no law may permit “arbitrary deprivation of property”. The test for arbitrariness requires that there be a rational connection between the deprivation and the end sought to be achieved and, where the deprivation is severe, that it be proportionate. A proportionality analysis assesses the purpose of the law in question, the nature of the property involved, the extent of the deprivation and whether there are less restrictive means available to achieve the purpose;
o the stronger the property interest and the more extensive the deprivation, the more compelling the State’s purpose must be to justify the deprivation. Where the deprivation is extensive, the test for non-‐arbitrariness does not merely have regard to considerations of rationality but also has regard to whether the means chosen are disproportionate to the purpose, with reference to the availability of less restrictive means;
o in the present circumstances, proportionality provides the relevant test because the Bill provides for the total extinction of a contractual right. The Constitutional Court has held that “where the regulatory legislative deprivation (viewed objectively) would extinguish” a right, then arbitrariness must “be tested against proportionality” rather than mere rationality.3 BASA submits that the Bill does not satisfy this test as, on a procedural level, the Bill provides that a credit provider may be deprived of contractual rights without being afforded a hearing. We have dealt with this above. The Bill therefore permits arbitrary deprivation of property because it is “procedurally unfair”.4;
o on a substantive level, the Bill is arbitrary in several respects. The explanatory memorandum states that “the Bill will provide relief to over-‐indebted South Africans who have no other effective or efficient options to extract themselves from over-‐
2 National Director of Public Prosecutions v Carolus and Others 2000 (1) SA 1127 (SCA) at para 34, our underlining 3 Shoprite Checkers (Pty) Ltd v MEC for Economic Development Eastern Cape 2015 6 SA 125 (CC) at para 82. 4 Reflect-‐All 1025 CC v MEC for Public Transport, Roads and Works, Gauteng Provincial Government 2009 (6) SA 391 (CC) at para 39.
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indebtedness”. It is therefore plain that the debt intervention provisions in the Bill are intended to afford a benefit to over-‐indebted consumers by extinguishing their debt. In assessing whether the Bill is arbitrary, it is necessary to have regard to whether this objective will be achieved in a manner that is constitutionally permissible. BASA submits that there are at least four reasons why the answer is “no”, as follows:
ü the first reason is that the Bill does not require a consumer to be over-‐indebted to qualify for debt intervention. On this ground alone, the provisions of the Bill are entirely out of line with the Bill’s stated objectives;
ü the second reason is that, even if a small group of consumers were to benefit by having their debt extinguished, a much larger group of consumers would be prejudiced by the broader impact of the Bill on the provision of credit in the economy. The effect of the Bill is that credit providers will be deprived of their contractual rights in circumstances where they could not have foreseen that consequence when they advanced money to borrowers. This will lead to a reduction in credit appetite, negatively impacting access to credit and possibly a potential increase in the costs of credit. In other words, the Bill will lead to credit becoming more expensive as credit providers would face greater and “uncertain” credit risks given the open-‐ended debt intervention initiatives that are envisaged in the Bill. This would have a negative impact on access to credit by lower income consumers in general;
ü the third reason is that there are already adequate measures in place to deal with over-‐indebted consumers. The NCA provides that an over-‐indebted consumer may approach a debt counsellor, an alternative dispute resolution agent, a consumer court or the ombud with jurisdiction to obtain relief. In practice, the banks assist over-‐indebted consumers in numerous additional ways (for example, by decreasing the interest rate; by waiving fees; by extending the term of credit; by granting payment holidays; by suspending payments; by allowing a consumer to restructure or reschedule payments; and by providing the consumer with an opportunity to consolidate his or her credit products into a new consolidated credit product). These mechanisms provide adequate protection for consumers who are struggling to comply with their credit agreement repayments. It is disproportionate for the Bill to seek to address the problem by providing for much more drastic measure of extinguishing debt; and
ü the fourth reason is that the Bill draws a series of lines that are inherently arbitrary. For example, that only consumers who will qualify for debt intervention are those with a gross income of R7 500 and less per month. There is no rational justification for why a consumer earning R7 490 per month will qualify for debt intervention but a consumer earning an additional R20 per month will not qualify. The Bill draws an equally arbitrary line when it comes to determining which lenders face the possibility of being deprived of their contractual rights. It is only credit providers as defined in the NCA who face this prospect, notwithstanding the fact that consumers do not only become over-‐indebted or financially distressed because of debt governed by the NCA. The Bill is therefore arbitrary because it exposes credit providers to “debt intervention” whilst a household’s other creditors (such as municipalities or Eskom) do not face any similar exposure.
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c) Absence of Guidance:
BASA submits that these provisions of the Bill are unconstitutional “because they confer a wide discretion without any guidance as to their exercise” 5, detailed as follows:
i. parliament may not delegate powers to administrators in terms which are so vague that they do not in any meaningful sense fetter an administrative body in the exercise of its delegated powers. The Constitutional Court explained the principle in Affordable Medicines Trust v Minister of Health 2006 3 SA 247 (CC) para 34: “…the delegation must not be so broad or vague that the authority to whom the power is delegated is unable to determine the nature and the scope of the powers conferred. For this may well lead to the arbitrary exercise of the delegated power. Where broad discretionary powers are conferred, there must be some constraints on the exercise of such power so that those who are affected by the exercise of the broad discretionary powers will know what is relevant to the exercise of those powers or in what circumstances they are entitled to seek relief from an adverse decision. These constraints will generally appear from the provisions of the empowering statute as well as the policies and objectives of the empowering statute.”;
ii. the proposed section 88B falls foul of this principle. It requires the NCR to decide whether a consumer “qualifies for debt intervention”, but does not indicate with adequate particularity in what circumstances a consumer will “qualify” for debt intervention. Although the proposed section 88B(4) requires the NCR to have regard to “the criteria set out in section 88A(2) and (3)”, there are no “criteria” specified in those sections (other than a requirement that the total unsecured debt must not exceed R50 000). Indeed, the proposed section does not even require that a debt intervention applicant must be unable to repay his or her debt. Although the Bill proposes to amend the long title to state that the NCA seeks to provide for “debt intervention in cases of over-‐indebtedness”, the proposed section 88B fails to specify that a consumer will qualify for debt intervention only in the case of over-‐indebtedness; and
iii. similarly, the proposed section 88C requires the NCT to assess whether a consumer “qualifies for debt intervention”, but does not contain any criteria to indicate in what circumstances a consumer will “qualify”. In particular, the proposed section 88C does not require that a consumer must be over-‐indebted.
5.1.2.2 Section 88F
The second mechanism for debt intervention is contained in the proposed section 88F. It empowers the Minister to prescribe “a debt intervention measure to alleviate household debt”. The measure may include “determining the maximum interest, fee or other charges applicable under a credit agreement for a specified period” (proposed section 88F(4)(b)) or “declaring debts under a credit agreement as extinguished” (proposed section 88F(4)(c)).
As indicated above, Parliament may not delegate law-‐making powers in terms that are so vague that they do not in any meaningful sense fetter an administrative body in the exercise of its delegated powers. Parliament must furnish adequate guidelines to indicate how the Minister is required to exercise his law-‐making powers. The Bill fails to do so since it leaves the Minister at large to
5 Janse van Rensburg NO v Minster of Trade and Industry 2001 1 SA 29 (CC) at footnote 29.
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“prescribe a debt intervention measure to alleviate household debt” in a manner that overlaps with the first mechanism for debt intervention.
The proposed section 88F(4)(c) appears to envisage that the Minister may by regulation declare “debts under a credit agreement as extinguished”. The conferral of such an extraordinary power on the Minister violates the property clause in the Constitution for the reasons given above in the context of the first mechanism for debt intervention. In sum, the proposed section 88F permits arbitrary deprivation and also permits expropriation without compensation.
5.1.3 Clauses dealing with “Credit Life Insurance”:
The proposed section 106(1A) makes it obligatory for a credit provider and a consumer to “enter into credit life insurance” in circumstances where the term of the credit agreement exceeds six months and the principal debt does not exceed R50 000. Unlike in the case of section 106(1), the “credit life insurance” may not be concluded with a third party; it must be concluded with the credit provider.
The proposed section 106(4) provides that, if a credit provider proposes to the consumer the purchase of a particular policy of credit life insurance as contemplated in subsection (1A), “the consumer must be given … the right to waive that proposed policy and substitute such a policy of the consumer’s own choice”. It is not apparent how the consumer could “substitute a policy of the consumer’s own choice” in circumstances where the proposed section 106(1A) makes it obligatory for the policy to be issued by the credit provider.
The explanatory memorandum states that the purpose of the proposed section 106(1A) is to provide “for mandatory credit life insurance on all credit agreements for longer than six months but not more than R50 000 in value to prevent lower income groups from falling into over-‐indebtedness due to changes to their financial circumstances”. However, this objective could be achieved by requiring that credit life insurance be provided by the credit provider or any third-‐party insurer. In other words, the explanatory memorandum does not justify the restriction in the proposed section 106(1A) that the credit life insurance must be provided by the credit provider.
From the perspective of the consumer, the restriction in the proposed section 106(1A) is arbitrary because there is no rational basis for depriving him or her of the ability to conclude “credit life insurance” with a third party. From the perspective of the credit provider, the provision is arbitrary because it obliges a credit provider to register as an insurer and to comply with the associated regulatory requirements even though it may have no interest in providing insurance.
BASA submits that the proposed section 106(1A) violates section 22 of the Constitution since it regulates the practice of a trade in a manner that is not rationally connected to the achievement of a legitimate governmental purpose. 6In any event, the proposed section 106(1A) is inconsistent with the requirement of the rule of law that there must be a rational connection between legislation and the achievement of a legitimate governmental purpose.7
6 Affordable Medicines Trust v Minister of Health 2006 3 SA 247 (CC) at para 77 7 New National Party of South Africa v Government of the Republic of South Africa 1999 3 SA 191 (CC) at para 19
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5.2 Legal and Operational/Practical Implementation Concerns with the Bill.
BASA submits that there are several legal and operational/practical implementation concerns with the Bill of which we are dealing with the 7 most significant concerns below in a summarised manner as follows:
5.2.1 Clause 1:
The Bill proposes the amendment of the purpose of the National Credit Act 34 of 2005 (NCA) on a principle level, in that the consumer’s obligation to satisfy all debt obligations under responsibly granted credit agreements in full is repealed and replaced with the principle that a consumer only has to satisfy all debt obligations under responsibly granted credit agreements if the consumer’s current or future financial situation so permits. It is unclear what is meant by “if the consumer’s current or future financial situation so permits” and how this will be determined. This proposed shift in the purpose of the NCA, and therefore the interpretation of the provisions of the NCA, is affected without the review of the credit policy underpinning the NCA.
This approach is misaligned to the other purposes the NCA is legislated to achieve and will lead to inequity in the credit market, in that the rights of consumers will enjoy preference above the rights of credit providers. Uncertainty and higher credit risk is introduced into the credit market, as credit providers may not be able to collect the debt under responsibly granted credit agreements. Credit providers will have to price for this risk and uncertainty, which will lead to expensive credit and a decrease in credit being granted. The implications on impairments have furthermore not been adequately considered. The consumer’s right to access credit may therefore be negatively impacted.
BASA is of the respectful view that the resolution of disputes under the NCA should be consensual and the submissions of all the parties to the dispute should be considered. The resolution of disputes should be underpinned by the principles of reasonableness and fairness. The principles enshrined in the Constitution of the Republic of South Africa (the Constitution) and the Promotion of Administrative Justice Act 3 of 2000 (PAJA) as it relates to administrative action should be equally applied to the resolution of disputes under the NCA.
We are of the view that the proposed amendments to section 3 should not be effected.
5.2.2 Clause 11:
We, respectfully, do not support the introduction of the proposed section 82A. The proposed provision does not indicate how a credit provider or debt counsellor should reach an objectively reasonable suspicion of reckless lending, especially in lieu of the fact that the credit provider or debt counsellor would not be in possession of those facts (information and documents) which existed at the time of entering into the credit agreement in question and the defences available to the credit provider in question. A credit provider may also be placed in a position where it will be forced to incriminate itself or face penalties.
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The proposed provision does not indicate what manner and form the reporting of the suspected reckless lending should take. The content of this report is not stipulated, and the provision is devoid of timeframes as to reporting requirements. We are concerned that the NCR will not have the necessary capacity to deal with an avalanche of suspected reckless lending reports.
The proposed provision is open to abuse by unscrupulous credit providers and debt counsellors. These credit providers and debt counsellors could make frivolous and vexatious allegations of reckless lending without facing any penalties and the impacted credit provider would have no recourse. This could lead to anti-‐competitive behaviour.
It is imperative that the NCR not play the role of an adjudicative body and an investigative body. The NCR should not play both roles. The NCR should not be in the position to investigate whether a credit agreement is reckless, declare same as such and suspend the credit agreement. The adjudication function should remain and rest with the NCT or the court. Credit providers should be permitted the opportunity to participate in the investigation and adjudication process and make submissions in its own defence.
5.2.3 Clause 14:
The Bill proposes the introduction of a new debt intervention process to be utilized by financially distressed and over-‐indebted consumers who do not currently benefit from the existing debt intervention mechanisms. The process is not clear and is cumbersome. BASA is of the respectful view that the existing debt intervention mechanism of debt review could be enhanced to provide appropriate debt relief to these consumers. BASA is not in support of the extinguishing of debt as there are less invasive mechanisms to assist financially distressed and over-‐indebted consumers without introducing the removal of contractual rights and introducing moral hazard. The proposed debt intervention process will create an imbalance in the credit industry between the rights and obligations of credit providers and consumers, as consumers will receive more rights and credit providers will be deprived of their rights. This imbalance will adversely impact access to credit by consumers and will increase the costs of credit.
The envisaged debt intervention mechanism should stipulate clear and well-‐defined qualifying criteria for consumers and exclusion criteria of certain credit agreements. This would prevent legal uncertainty, interpretational difficulties and abuse of the mechanism by mala fide consumers. It is extremely important that only an over-‐indebted consumer as defined in section 79 of the NCA may apply and qualify for debt intervention.
For the debt intervention process to be procedurally and administratively fair and just, the participation of credit providers throughout is essential. The credit providers’ contractual rights will be severely impacted by the proposed debt intervention mechanisms, as the debt under a credit agreement may be completely erased even if it was responsibly entered into. There are no clear timeframes defined in the Bill for the debt intervention milestones which should be achieved by the applicant, the NCR and the NCT. In the event of non-‐adherence, the credit providers should have recourse. The NCR and the NCT should also update the credit bureaux on a regular basis with the status of the debt intervention application.
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The impacts and prohibitions a debt intervention application places on the consumer should be extended to prevent abuse and the escalation of over-‐indebtedness. The applicant should be required to complete a financial literacy and budgeting skills programme upon application for debt intervention and an assessment. This would assist the applicant in the improvement of his or her financial position. The requirements to obtain a rehabilitation order should be expanded upon to ensure that the consumer is truly financially rehabilitated, relating to his or her financial position and his or her financial behaviour.
We are respectfully not in support of the debt intervention which may be prescribed by the Honourable Minister and refer to our submission on ‘Unconstitutional Concerns’ in this regard. We are also concerned that the proposed prescribed debt intervention would have an adverse impact on the credit industry, as well as the micro-‐ and macro-‐ economy. This will be further detailed in our impact assessment
5.2.4 Clause 6 and Clause 10:
We are of the view that the application for debt intervention and the status of the debt intervention application would need to be reported to the credit bureaux by the NCR and NCT in a timely manner and on a regular basis. This will protect both the over-‐indebted and financially distressed consumers from increasing their over-‐indebtedness and the credit provider from inadvertently entering into a credit agreement with a consumer subject to debt intervention proceedings.
It is our submission that the minimum and maximum retention period of the debt intervention indicator on the credit bureaux should be 12 months and 60 months, respectively. This will assist credit providers with conducting responsible affordability assessments and establishing the consumer’s debt repayment history under credit agreements.
It is important that regulation 17 should be reviewed and aligned with the proposed legislative changes.
5.2.5 Clause 4:
The proposed new power/authority afforded to the NCR, which is that the regulator may suspend credit agreements which the regulator considers reckless is contrary to the requirements of the Constitution and PAJA (referencing Part A above). This new power/authority does not require the NCR to consider the submissions of all affected parties and will make the regulator both the investigator and the adjudicator which is contrary to the doctrine of separation of powers.
The NCR’s power to evaluate and refer debt intervention applications is not qualified by specific evaluation criteria and timeframes. BASA is further concerned that the NCR may lack the necessary capacity to deal with a large inflow of debt intervention applications. The employees or agents of the NCR who will be dealing with debt intervention applications should have the necessary skills, education, training and qualifications. Any bias on the part of the employee or agent should be prevented by way of disqualification criteria.
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5.2.6 Clause 17:
A credit life insurance policy is offered by insurers and entered into between the insurer and the consumer. Most credit providers are not insurers and are not registered as such with the Long-‐Term Insurance Registrar. The proposed amendments to Section 106 will impact insurers, insurer associations, the Financial Services Board and the Long-‐Term Insurance Registrar. We therefore propose that these stakeholders should be consulted on the introduction of further compulsory credit life insurance and the maximum permissible cost of same.
The newly proposed compulsory credit life insurance may lead to financial exclusion and have an adverse effect on the consumer’s right to access credit, in that the credit provider would be prohibited from entering into this type of credit agreement with the consumer if the consumer cannot obtain or afford the compulsory credit life insurance. It is further important to note that certain events may not be covered by the credit life insurance even if the consumer is insured, e.g. voluntary severance packages.
The proposed amendment to section 106(2)(c) assumes that individual rather than group underwriting occurs with credit life insurance policies. This assumption is incorrect. It is further unclear how the credit provider or insurer could determine whether the insured risk would not reasonably materialize. We are of the view that the abuse the proposed amendment is endeavouring to prevent has already been addressed in the Final Credit Life Insurance Regulations.
5.2.7 Clause 23 and Clause 24:
BASA submits the following specific comments in relation to clauses 23 and 24:
5.2.7.1 Clause 23 -‐ Proposed New Section 157A:
We support the proposed amendment, but suggest that the consumer or debt intervention applicant should act in a responsible and truthful manner throughout the debt intervention process. Accordingly, consumers should be monitored throughout the applied debt intervention process and the specific measures granted – this might include regular interaction with the NCR and NCT for the duration of the applied debt intervention period. This will assist the NCR and NCT in assessing the circumstances and possible setbacks of the consumers or improvements in consumer behaviour, which will support further determinations in respect of the consumer’s financial situation and eligibility for additional debt interventions. Offences should also be created for reckless borrowing, where consumers mislead credit providers to obtain credit as well as where a debt intervention applicant fails to act responsibly and honestly in a debt intervention process.
5.2.7.2 Clause 23 -‐ Proposed New Section 157B:
We do not support the proposed section as the penalties for various forms of prohibited conduct already exist in the NCA. We are of the respectful view that the administration and implementation of these penalties should be improved upon, rather than creating further penalties in the form of offences that may be committed without intent and even if the credit provider is acting in a bona fide manner. The negative consequences of prohibited conduct are already ameliorated by the penalties currently contained in the NCA.
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5.2.7.3 Clause 24 -‐ Section 161: Amendment and inclusion of penalties.
We are of the view that the proposed amendments to Section 161 are superfluous as it deviates from the object of the Bill. The object of the Bill is not to create new offences and the penalties associated therewith, but rather to address the financial distress and over-‐indebtedness of certain no-‐ or low-‐income consumers.
We refer the Committee to Annexure A which sets out the detailed comments in relation to the 7 most significant concerns as mentioned above as well as the remainder of the clauses proposed in the Bill.
An implementation/transitional period of 18 months will be necessary to allow the credit market and industry to prepare for any amendments that may come into effect, the reasons for this are as follows:
a) credit providers will have to establish internal debt intervention departments which will have to be staffed, for which systems will have to be developed, for which budget will have to be created, etc.;
b) existing systems will have to be enhanced to allow for the implementation of the Bill including the creation of business requirements and functional specifications, development and testing time, etc.;
c) substantial changes will be required in terms of banks’ bad debt provisioning models and systems, refer to the Directive7 and IFRS9 implications in Paragraph 5.3.4 Impact on the Banking Industry;
d) the development and amendment of new and/or existing documents such as credit agreements, terms and conditions, application forms, declarations by the consumer, etc.;
e) the updating of the relevant training material and the subsequent roll-‐out of the training to new and existing employees;
f) the development, documenting and implementation of new processes and procedures in support of the new proposed debt intervention measures; and
g) credit bureaux and credit providers will need to develop their systems and processes to effectively deal with the additional Economic and Social Impacts of the Bill.
5.3 Economic and Social Impacts of the Bill.
5.3.1 High Level statistics on consumers that could qualify to apply for Debt Intervention
The approach taken in gathering the consumer statistics was for BASA member banks (namely ABSA, African Bank, Capitec Bank, FirstRand Bank, Nedbank and Standard Bank) to determine where the consumer’s total gross monthly income was less than R7 500 and the consumer had less than R50 000 total outstanding unsecured debt as at 24 November 2017 (or as close as possible to this date). COMPUSCAN (a registered Credit Bureau) de-‐duplicated the records from the various banks and provided BASA with a summary of the total number of affected consumers and the total financial exposure of the outstanding credit agreements held by the affected consumers, based on their extract of data as at 24 November 2017.
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Please refer to the Diagram 3 overleaf that reflects the number of banking consumers that would be eligible to apply for Debt Intervention at the NCR and that are eligible to be granted Debt Intervention Orders by the NCT.
Diagram 3: Debt Intervention banking consumers and their total outstanding unsecured debt (as at 24 November 2017).
Source – BASA member banks’ data (ABSA, African Bank, Capitec, FRB, Nedbank & Standard Bank) and COMPUSCAN data.
Notes pertaining to the diagram above: -‐
1) The total number of consumers that are credit active and that are banking consumers, with a valid South African identity number, earning a gross monthly income of R7500 or less and that have total value of less than R50 000 outstanding in unsecured debt
2) The total number of consumers that are credit active and that are banking consumers, with a valid South African identity number, earning a gross monthly income of R7500 or less and that have an amount of less than R50 000 total outstanding unsecured debt; and who are not under debt review and who do not have legal action taken against them (in terms of credit agreements).
From the high number of banking consumers indicated in Diagram 3 it is evident that the proposed Debt Intervention as envisaged in the Bill is far reaching in terms of the number of consumers that would qualify to apply, and this is likely to cause severe capacity strain at both the NCR and the NCT.
A broader inclusive study is required to fully understand the level of over-‐indebtedness of consumers and hence in need of Debt Intervention. The majority of consumers manage their financial matters in a responsible way and payment performance has been improving (as is evident from Diagram 1 (please refer to Paragraph2 Current Credit Landscape) that highlights the reduction in consumers with impaired records over time). National Treasury has commissioned research analysis on over-‐indebted consumers, in order that aspects of the Bill can be clarified.
In the same way that banks strive to advance responsible lending to consumers, consumers must also borrow funds in a responsible manner. Encouraging responsible payment behaviour is a fundamental aspect of a well-‐functioning credit market and should not be compromised. Indebtedness and
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financial distress of consumers stretches beyond just credit and any debt intervention should take cognisance of this.
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There are four different dimensions from an impact assessment perspective as follows: -‐
5.3.2 Consumers and Credit Providers:
a) Responsible lending and responsible borrowing go hand in hand and form the core of a sustainable credit market and industry. Applying standardised debt intervention measures and debt intervention criteria to targeted populations could be seen to be discriminatory and may dis-‐incentivise consumers who repay their debt willingly and conduct their credit relationships responsibly.
b) Consumers who previously repaid their debts could become dis-‐incentivised to do so in the future as standardised debt intervention measures and debt intervention criteria reward negative repayment behaviour. An example hereof is the farmers in India that are unable to borrow money due to the moral hazard that arose from standardised debt intervention measures and debt intervention criteria. Unconditional debt intervention affected the beliefs about the enforceability of debt contracts and the consequences of default (reference The World Bank Policy Research Working Paper 6258).
5.3.3 Cost of Credit/Access to Credit:
a) Legislated and broad-‐based debt intervention measures and criteria may make it extremely difficult for credit providers to adequately determine the risk associated with extending credit in the lower income segments, which are the segments targeted here, and hence pricing for the risk will become extremely difficult. A confluence of pricing, regardless of individual consumer risk, will arise at a portfolio level to offset the inability to price for the risk. This will mean that consumers who have a good repayment history will no longer be rewarded for such behaviour when they apply for further credit; and
b) Access to credit could potentially decrease due to potential de-‐risking and the cost of credit will increase because of a culmination of factors brought about by the economy and the recent amendments to the NCA.
c) The NCA, as one of its objectives, focusses on ensuring unscrupulous lending practices are curbed, which has in many ways started to work. Legislating broad based debt intervention relief measures accompanied by vague debt intervention criteria could result in a reversal of positive developments and/or accelerate the growth of unscrupulous lending practices.
5.3.4 Impact on the Banking Industry:
a) In addition to the potential impact on the banking industry, the potential impact on banks given the South African Reserve Bank (SARB) Directive 7 of 2015 (commonly referred to as “Directive7”) needs to be considered in more detail.
b) In short, the purpose of Directive7 is firstly to provide clarity on how banks should identify restructured credit exposures (and more specifically distressed restructures) and secondly how to treat them for purposes of the definition of default. The directive also aims to address the
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reporting of restructured credit exposures as well as the rehabilitation of non-‐performing loans using restructuring.
c) The requirements indicate that
i. If the loan is in arrears at the time of the restructure or has been in arrears in the previous 6 months, it should be regarded as a distressed restructure
ii. If the loan is not in arrears at the time of the restructure and the terms and conditions were changed (e.g. customer applies for debt review) to prevent the customer from going into arrears, it should also be regarded as a distressed restructure.
d) Where a loan is classified as a distressed restructure, it should then be classified as “in default” and an appropriate impairment should be raised. Where the consumer cures, the loan should still be classified as in default (and an appropriate impairment raised) for at least 6 months after the point of rehabilitation. An impairment is raised when there is a reduction in the carrying value of an asset (the loan in this case) because the asset no longer generates the benefits as expected earlier as determined by the bank. This is based on regulatory requirements as a result of the changes in value of the asset.
The practical implication of the above is illustrated in Diagram 4 below. This indicates that the Bill in its current format will also require changes to be implemented in the banks’ impairment policies to ensure that there is compliance with the SARB legislation, which will have a direct financial impact. SARB will also have to revise Directive7 to incorporate an application for Debt Intervention and the Department of Trade and Industry will need to engage with SARB in this regard
Diagram 4 -‐ Impact of the Draft Bill on banks considering Directive7
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Apart from the regulatory requirements under Directive7, banks are also currently in the midst of implementing the International Financial Reporting Standard accounting for financial instruments as promulgated by the International Accounting Standards Board (commonly known as “IFRS9”).
Under IFRS9, an asset should be written off for financial reporting purposes if there is a very low likelihood of further expected recoveries from the account.
a) Under IFRS9, accounts that are subject to debt intervention will be categorised and will lead to an assessment of future expected recoveries on the credit agreement. It is anticipated that future recoveries, discounted by a period exceeding 24 to 36 months, given the suspension of a credit agreement envisaged in the Bill, is likely to render the present value of the advance very low. It will likely exceed thresholds for justification as an asset.
b) Therefore, apart from an increase in provisions, should the Bill be implemented as currently proposed, it is likely that banks will suffer significantly increased write-‐offs and resultant impairment charges on impacted portfolios;
c) The Banks have only just finalised the development and implementation of their IFRS9 models. This has been completed prior to the publishing of the Bill. Banks will therefore be required to revisit their unsecured lending models to be able to factor these changes. This will mean model redevelopment, testing and regulatory approval from the SARB before implementing based on the updated model changes. Significant costs will therefore be incurred by the banks, against the backdrop of only recently introduced legislation.
5.3.5 Impact on the Economy:
a) The banking system has, as one of its foundations, an undertaking by borrowers to repay the loans that they obtain from banks. Any compromise to this principle will have severe consequences for the industry and, given the role of the banking sector in the economy, for the economy, e.g. job losses. It should be noted that one job loss could mean 4 people (the medium family size) being without an income.
b) The proposed implementation of the Bill, compounded by low economic growth, the latest downgrade and potential US rise in interest rates leads to uncertainty about the future direction of interest rates which could exacerbate the distress levels of South Africans, increase job losses and unemployment levels.
c) Any further pressure introduced by the proposed introduction of legislated broad-‐based debt intervention measures and criteria will add to the negative business sentiment and environment, with associated negative consequences for inclusive growth and investment.
d) Banks need to demonstrate that they can recover monies lent to consumers, thereby ensuring depositor and investor confidence. Any restriction on banks’ ability to recover monies lent will result in an increase in loss rates on unsecured portfolios, with resulting changes in risk appetite and pricing required to ensure portfolio profitability and sustainability.
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e) Investors (including institutional investors such as Pension Funds) will seek to invest funds in industries and/or countries where the returns on investments are higher, there is protection of investor capital and where there is less earnings volatility;
f) Banks’ ability to do corporate lending to micro-‐financiers, retailer lenders, etc. will be impacted negatively due to the unknown impact of the Bill on their ability to lend and the resulting uncertainty on their financial outcomes (as corporate credit providers will also have to provide for the impact of the Bill).
6. Proposed Solutions to assist Over-‐Indebted Consumers
BASA and its members are not in favour of the legislated discharge of debt obligations as this will convey the wrong message to consumers in terms of their responsibilities and behaviour in the credit market and industry. Consumers will be encouraged to incur debt and then default on their debt as they would expect the debt obligation to be expunged. BASA believes that this will fundamentally change consumer behaviour going forward and create potential moral hazard, as was the case in other countries such as India.
If the losses incurred by banks increase significantly because of consumers defaulting on their credit agreements, one of the consequences can be that the access to credit could be significantly restricted for poor and or low-‐income consumers, due to the significantly higher cost of credit (please refer to Paragraph 5.3 Economic and Social Impacts of the Bill). BASA believes that this is not an intended or desirable outcome for consumers and that it may ultimately lead to financial exclusion.
Notwithstanding the negative financial implications for banks and other credit providers, appropriate debt intervention measures are necessary, and should aim to rehabilitate, educate and re-‐introduce rehabilitated consumers into the credit market to become economically active citizens. This will ultimately have a positive outcome for the economy, other consumers, credit providers and the South African credit market and industry in its entirety.
The fundamental success of any debt intervention measure hinges on the ability to restrict over-‐indebted consumers from accessing further credit during the period in which the consumers are in the debt intervention process, including their rehabilitation period. The cornerstone of successful implementation is that any consumer who is eligible for, and is granted debt intervention must be excluded from accessing further credit for a specific legislated duration, which must include the period they are engaged in this process and the applicable rehabilitation period after benefitting from a debt intervention mechanism.
The only effective way to ensure that a consumer does not access further credit is to list that consumer on the credit bureaux as a “beneficiary” of a debt intervention mechanism. The listing must remain in place for an agreed upon rehabilitation period after the effective debt intervention mechanism has been implemented. The consumer must formally undertake not to apply, enter or use any further credit for a specified time. If the consumer reneges on this undertaking, the consumer must be removed from the debt intervention process and the credit provider can continue to legally enforce the credit agreements. It is important to emphasize that the debt intervention measure will not work if this fundamental concept is not agreed to and implemented.
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To achieve this, BASA recommends that consumers should undergo a mandatory financial educational programme to understand the basics of a budget, the importance of not spending more than what you earn, the importance of paying back all the debt owed and the associated consequences if debt owed is not paid back, the importance of savings, etc. prior to applying and being approved for debt intervention. Consumers must be assessed on their understanding to ensure that they will promote a culture of responsible borrowing and to prevent potential future moral hazard.
6.1 Key Principles of Sustainable Debt Intervention Mechanisms
The following key principles have been formulated to underpin sustainable debt intervention mechanisms:
1) The debt intervention mechanisms must have a contained scope of applicability
The scope of the debt intervention must be a focused and targeted one that seeks to provide relief to:
a) Consumers that are over-‐indebted due to a change in personal circumstances beyond their control AND;
b) Where existing formal debt intervention mechanisms either do not cater for their specific situation or where the cost to the consumer of these existing mechanisms is too high.
2) Foster and retain a culture of payment by the consumer
Consumers should undergo a mandatory financial educational programme to understand the basics of a budget, the importance of not spending more than what you earn, the importance of paying back all the debt owed and the associated consequences if debt owed is not paid back, the importance of savings, etc. prior to the debt intervention application being approved and relief being granted. Consumers must be assessed on their understanding of promoting a culture of responsible borrowing on the side of the consumer and to prevent potential future moral hazard.
BASA recommends that a financial educational programme must be made mandatory and must be completed by the consumer prior to the debt intervention application being approved, to retain a culture of payment by the consumer.
3) Existing Debt Management Structures and Mechanisms to be used
BASA is of the view that existing debt management mechanisms and structures should be used as the first port of call, prior to a debt intervention application being considered and approved. Debt review structures and processes are well established in the industry and should be used first. Debt intervention should only be considered if the established structures and processes are unable to solve for the debt. The existing debt review structures and processes can be improved on by making them more efficient and accessible. This mechanism is furthermore equitable and balances the rights and obligations of all relevant parties, i.e. consumers and credit providers.
4) The consumer should be rehabilitated
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Provided the consumer adheres to the terms and conditions attached to the granting of a debt intervention application, he/she must experience immediate financial relief and, in the case of a “low-‐income” consumer, should be rehabilitated over a maximum period of 3 to 5 (three to five) years after having fully repaid their debt as per the debt intervention arrangement. Upon concluding an applicable ‘rehabilitation period’, to be agreed with credit providers, they may be eligible to re-‐enter the credit market if they have also completed an educational programme.
6.2 Proposed Solutions to address the gaps that currently exist
BASA’s strong recommendation that existing debt management mechanisms and structures be used is made with cognisance that gaps exist, which should be addressed as illustrated in Diagram 5 below.
Diagram 5 -‐ Updated flowchart of the recommended solutions for where gaps exist after having considered the existing debt intervention measures.
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Source: Prepared by National Treasury for the Committee and presented on at the deliberations of 14 June 2017. (Updated by BASA with the to indicate the proposed solutions.
And
Over-‐indebted consumer
No income Regular income
No assets Assets
No income No Assets Debt Intervention
Measure
Debtor solvent Insolvent
Debtor sells assets and repays debt
Debtor approaches High Court to declare
insolvency and apply for voluntary sequestration
Sufficient assets to cover cost of sequestration application
Total debt less than R50 000
Apply for Debt Review
Application for debt administration ito section 74 of MCA
Judgement granted
Administrator appointed to
distribute payments to creditors
Debtor declared over-‐indebted
Debtor declared not over-‐indebted
Assess for reckless lending
Application declined
Challenge reckless lending
Court determines whether the sequestration will be to the advantage of creditors
Yes -‐ Sequestration order issued
Consumer pays according to the payment proposal
Gross monthly Income R7 500 or
less and Unsecured debt <
R50 000
Enter Subsidised Debt Review
Poor man’s sequestration
Gross monthly income >R7 500
Assessment for over-‐
indebtedness
No assets
Is there a shortfall after sale of assets?
Enter Subsidised Debt
Review for shortfall amt
LEGEND -‐ Proposed by BASA
Green Blocks
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6.2.1 No Income No Assets Debt Intervention Measure:
We recommend that the Regulators and stakeholders (i.e. credit providers, relevant associations, SARB, SARS, etc.) need to work together under the guidance of National Treasury to ensure the development of a sustainable funding model for a debt intervention measure for consumers who are over-‐indebted and have no income and no assets (NINA’s) or very little income (and can only pay for necessities e.g. food and transport), due to the potential impact of such a debt intervention measure on the Fiscus and the economy as a whole.
6.2.2 Poor Man’s Sequestration:
The Department of Justice and Constitutional Development should amend the Insolvency Act to make sequestration more accessible by introducing a poor man’s sequestration process.
6.2.3 Subsidised Debt Review:
We recommend that a subsidy fund be created to subsidise the cost payable to debt counsellors to assist consumers through the existing debt review mechanism. The funding for a subsidy/fund should be through the Fiscus and will benefit consumers, credit providers, debt counsellors, the economy and society. This is possible because there will be no additional costs to implement new debt intervention measures, as the existing debt review mechanism is well embedded to assist consumers faster and more efficiently. The subsidy fund will further encourage responsible behaviour by consumers as consumers will be accountable to society.
6.2.4 Debt Intervention After-‐care
We, in conclusion of this section, further recommend that an ‘after-‐care’ mechanism must be implemented whereby consumers that underwent a debt intervention process are properly monitored by the relevant bodies from the time of entering the debt intervention process through to being declared rehabilitated.
This mechanism must be used to evaluate:
a) whether the debt intervention measures are sustainable;
b) whether the debt intervention measures are effective and if not, how the debt intervention measures can be optimized.
6. Conclusion
BASA recognises that over-‐indebtedness is an economic and social problem that has far reaching consequences for the economy and society.
BASA and its members are supportive of the introduction and implementation of targeted and sustainable debt intervention measures to assist over-‐indebted consumers where:
• the circumstances the consumers find themselves in have changed for the worse in terms of having little or no income, through no fault of their own; and
• the existing legislated debt intervention measures, e.g. the debt review process, are not accessible and/or affordable to the specified consumer segment.
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BASA and its members do not support the introduction of debt intervention measures that:
• do not balance the respective rights and responsibilities of consumers and credit providers;
• do not encourage responsible borrowing by consumers;
• could potentially cause instability in the financial and credit market and industry;
• could have severe implications on the impairment levels and capital requirements of banks;
• could have a further negative impact on an already burdened South African economy and society (considering the recent downgrades by the rating agencies and very pedestrian growth).
BASA and its member banks must express serious concern that the proposed debt intervention, as per Section 88A to 88E, is an amnesty/moratorium by another name. Of even greater concern is Section 88F, which is the provision proposing on-‐going debt intervention measures to be prescribed by the Minister of Trade and Industry. The wide powers that are proposed to be given to the Minister may further impact the supply of credit in that credit providers will not be able to price for risk, as the extent of the risk is unknown. We must also, at a level of principle, express our concern at affording such broad and open-‐ended powers to a Minister, under any circumstances.
BASA respectfully submits that we cannot support the Bill, in its current format, as it does not balance the rights of consumers and credit providers and does not constitute a sustainable debt intervention measure. BASA humbly requests that the Committee review our submission and earnestly consider the alternative Debt Intervention mechanisms that BASA has proposed in its submission. The intention of these alternate proposals is to positively contribute to seeking a sustainable solution to relieve over-‐indebtedness experienced in the low-‐income and poor sector of the credit market. Within this context, it is also important to recognise the substantial concessions already being provided to over-‐indebted consumers as part of the existing debt review process, as well as voluntary measures by banks.
Furthermore, a well-‐functioning, sustainable and inclusive credit market is crucial for the sustainable growth and development of South Africa. The development of a credit market that is accessible to all South Africans, and in particular those who have historically been unable to access credit, is critical to both economic and social growth, but must unfold under sustainable market conditions. We have indicated, in this submission, our concern that the Bill, in its current form, will create uncertainty and could restrict risk appetite of formal legally regulated and registered credit providers. This would force demand into the informal and unregulated market, with considerable abuse.
We respectfully request and urge the Committee to afford us the opportunity to unpack our submission with members and go into detailed engagement. We will also be making a presentation at the public hearings being held at the end of January / beginning of February 2018. We request that BASA be given an hour and half to present at the public hearings due to the significant impact of the proposed Bill on the banking sector and the magnitude of our comments for which 20 minutes will not be sufficient.
We look forward to your considered feedback in respect of our submission put forward as well as the requests contained therein.
We remain at your disposal should you require any further information and/or clarification regarding this submission and matters related hereto.
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Thanking you in advance and with appreciation.
Yours faithfully,
Cas Coovadia
7. Annexures
7.1 Annexure A – Draft NCA Bill: Legal and Operational Concerns Comments Matrix
7.2 Annexure A1 – Draft NCA Bill: Legal and Operational Concerns Matrix Insert
END OF BASA SUBMISSION DOCUMENT
